Character Group Plc (LON:CCT): Signs of Struggles in Allocating Capital Efficiently
As an investor, it’s essential to understand the underlying trends of a mature business that’s past its growth phase. One key metric to examine is Return on Capital Employed (ROCE), which measures the amount of pre-tax profits a company can generate from the capital employed in its business.
What Is Return On Capital Employed (ROCE)?
ROCE is calculated using the following formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
For Character Group (LON:CCT), analysts use this formula to calculate its ROCE as follows:
0.17 = UK£6.5m ÷ (UK£74m - UK£35m)
Based on the trailing twelve months to August 2024, Character Group has an ROCE of 17%.
Industry Average and Comparison
The company’s ROCE is in line with the industry average of 17%. However, it’s essential to examine the trend over time to understand if there are any underlying issues affecting the business.
What The Trend Of ROCE Can Tell Us
Looking at Character Group’s historical ROCE movements, we can see that returns on capital were 33% about five years ago. However, they have substantially decreased since then, even though the company is utilizing roughly the same amount of capital as it was back then.
This combination of declining ROCE and stable capital employed can be indicative of a mature business with areas to deploy capital but lower returns due to new competition or smaller margins.
Effect of Paying Down Current Liabilities
Character Group has done well to pay down its current liabilities to 47% of total assets. This reduction in reliance on suppliers or short-term creditors can reduce elements of risk and make the business less efficient at generating ROCE.
However, as the company is now funding more operations with its own money, we’d like to see further reduction in current liabilities if possible.
The Bottom Line On Character Group’s ROCE
While Character Group may not currently earn the highest returns, we’ve examined the underlying trends and compared them to industry averages. The trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock.
Long-term shareholders who’ve owned the stock over the last five years have experienced a 18% depreciation in their investment, suggesting that the market might not like these trends either.
Investor Takeaways
- ROCE is a crucial metric to examine when evaluating mature businesses.
- Character Group’s declining ROCE and stable capital employed raise concerns about its ability to generate returns on investment.
- Paying down current liabilities can reduce risk but may also make the business less efficient at generating ROCE.
Alternatives To Consider
If you’re interested in companies that currently earn more than 25% return on equity, we’ve compiled a list of stocks that fit this criteria. Check out our free list here to explore these investment opportunities.
Conclusion
As an investor, it’s essential to understand the underlying trends and metrics that affect a company’s performance. In the case of Character Group, we’ve examined its ROCE and compared it to industry averages and historical trends.
While the company may not currently earn the highest returns, there are areas for improvement. We’d recommend investors exercise caution when considering investments in mature businesses with declining ROCE.
Disclaimer
This article by Simply Wall St is general in nature and provides commentary based on historical data and analyst forecasts only using an unbiased methodology. Our articles are not intended to be financial advice and do not constitute a recommendation to buy or sell any stock, nor do they take account of your objectives or financial situation.
We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
References
- Character Group (LON:CCT) – Company Profile
- Simply Wall St (2024). Return on Capital Employed January 7th 2025. Retrieved from https://www.simplywall.st/stocks/gb/london/cct/character-group-royal-dutch-shares
- Simply Wall St (2024). Character Group (LON:CCT) – Warning Signs. Retrieved from https://www.simplywall.st/research/warning-signs/gb/london/cct/character-group-royal-dutch-shares
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